Child's costly illness puts a wrench in couple's retirement plans

Saddled with paying $1,700 a month plus travel costs for their 30-year-old son's medical treatment, this couple isn't sure they can afford to retire anytime soon, especially if they have to keep paying their son's bills

Situation: Uninsured medical treatments have cut retirement income Strategy: Defer retirement plans, raise returns on investments Solution: Increased capital, income for retirement, but not before 65

Exhausted from years of worrying about the health of their son, Ralph, who at 30 has suffered from a decade of neuromuscular illness, a Saskatchewan couple we’ll call Robert and Felicity are trying to set a date for their retirement.

They spend $1,700 a month plus the cost of travel to a clinic in Oregon that has been treating Ralph (not his real name). Apart from that, they live frugally. Each is 56. They have built up savings of $750,000, mostly in RRSPs, but worry it won’t be enough if they have to keep paying for Ralph’s treatments. The cost of care has not been covered by the provincial medical care plan. The government bureaucracy views his U.S. treatments as unconventional and, in the absence of a referral letter from a Saskatchewan doctor to the U.S. clinic, the couple has had to pay the bills themselves. Even then, the Canada Revenue Agency has denied deductibility, mostly for the same reasons that the province has refused payment.

Ralph, who is unemployed, has no financial resources other than his parents. The cost of treatments amounts to a little more than 20% of the couple’s $8,156 monthly take-home income. Robert and Felicity are operating on the assumption the costly treatments will probably end by the time they are 60 and no later than 65. In retirement, their needs will be modest, for they plan to stay in their home, perhaps travelling to the U.S. for warmth in winter. When they are too old to mow the lawns, they expect to sell their house and move into a retirement condo.

Family Finance asked Andy Husband, a financial planner who heads AMH Financial Services in Edmonton, to work with Robert and Felicity.

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Strategies

It is going to be difficult to maintain their present way of life if they retire too soon, Mr. Husband says. Robert, who works for a manufacturing company, has no company pension plan. If they retire before 60, they would have to rely on the defined-benefit pension which Felicity, a civil servant, anticipates would pay $12,500 a year until age 65. Then it would drop to $9,600 a year, with Canada Pension Plan benefits making up the difference. Her pension to age 60, plus $17,375 annual income from investments, would give them $29,875 a year before tax. After average tax of perhaps 10% on this income, the couple would have $26,888 a year, or $2,240 a month, to spend to support monthly spending, including continuing treatments for Ralph but net of all savings of $5,420 a month.

The deficit could be paid out of savings at a rate of $3,160 a month. In the five years just from age 60 to the time that both would be able to take CPP without reductions, they would have to draw $189,600 from savings. That would substantially impair their capital and cut what they would have to spend in the years from 65 onward. Retirement before age 60 is not prudent unless Ralph no longer needs costly care, Mr. Husband says.

If the couple waits to age 65 to retire, they would have $14,740 of CPP payments, $9,600 from Felicity’s defined-benefit work pension, two $6,540 OAS payments, $27,175 of investment income based on extended RRSP investment returns, more years of saving and deferred savings drawdowns for total pre-tax income of $64,595 a year. Allowing for 15% tax, the couple would have about $4,575 a month to spend. They would still have to erode capital at $825 a month to balance their budget, Mr. Husband says.

Boost Returns

Currently, they are invested in relatively safe but low-return bond funds, which hold mainly government issues that yield about 2.0% before fees and some corporate bonds with yields of 3.0% to 4.5% before fees. They also hold funds with shares of large-cap Canadian corporations with dividend yields about 3.5% to 4.5% a year. Finally, they have $105,000 in low-interest taxable savings accounts and tax-free savings accounts. The average $17,375 yield of the total portfolio is 2.2% before tax.

It’s not a great deal for more than three-quarters of a million dollars in savings.

There are several things Robert and Felicity can do to boost income from their financial assets. First, raise the rate of return on their financial assets. Shifting some of their low-yield bond investments to dividend-paying large-cap Canadian corporations could add perhaps 1.0%, or $7,750 before tax, to returns on their $775,000 of financial assets. Cutting fees on mutual funds by switching to exchange-traded funds with fees of no more than one-third of 1% a year could add another 1.0% and perhaps more to pre-tax income. The total obtainable by this portfolio housecleaning would boost pre-tax income by $15,500 a year before tax or by $1,100 a month after 15% income tax. It would be enough to make them cash flow-positive in retirement. Winter vacations, summer golfing holidays and perhaps setting aside money for Ralph’s future use would then be easy to afford.

Robert and Felicity are diligent parents whose love for their child has cost them a great deal in financial terms. If medical treatments work out and the $20,400 they spend each year on treatment can stay in their hands for investment, their standard of living in retirement at any point would grow dramatically, Mr. Husband says.

“For now, assuming that treatments continue, their way of life will have to accommodate spending that will force them to have a modest retirement.”